Key nuts and bolts for margin protection

Shay: Hey everyone, this is Shay with Ag View Solutions. Before today's episode, just wanted to take a minute to remind you all of 3 things as we head into harvest this fall, and that's to be safe, be smart, and be healthy. And when we talk about being safe, primarily what we're looking at is when it comes to PTOs and guarded pieces of moving machinery, be smart about it. You know, don't wear that loose clothing, don't step over something just to save a minute. Be careful and watch that stuff. The second thing is the grain when it comes to safety. We hear about it every year. Don't make dumb decisions when it comes to grain in storage bins, grain under moving equipment, grain in grain carts, things like that. Just be really smart about it. Don't be a statistic. The third thing when it comes to safety is just working on equipment.

So whether you're out in the field or doing stuff in the shop, take time to have the proper precautions and measures in place and also secondary measures. I know safety's a word that gets thrown around a lot, but when it comes to this message today, if you've heard it 1,000 times, it's worth hearing it 1,000 more times. So let this message sink in. Second one is just being smart. You know, take time to get sleep when it comes to this harvest season. I know we're all guilty of it. I am myself of trying to work a little harder than we should, a little longer than we should. When your body's telling you you need sleep, Take time to get that sleep. Stay off your phone on the road. There's tons of hands-free devices out there. They cost next to nothing anymore. Use those hand-free devices. Take a minute to pull off the road if you need to. Don't put others' lives at risk.

And then finally, just that smart driving, you know, so whether it comes to speed or if you're pulling in Hydrus tanks or you have wagons, be a defensive driver, but also don't be a problem on the road. Okay. The things that are going on that seem like emergencies right now, 5 days down the road are going to work out. So be safe when you're out there on the road. Final thing is just staying healthy. You know, so I already mentioned sleep, but it's important. I'm going to reiterate it. We need sleep as we get through this marathon, right? You know, sprinting is a— or planting is a sprint and harvest is a marathon. So keep that in mind. Get that sleep when you need it. Second thing is just finding good food. We're all guilty of wanting to eat our Snickers by 11 a.m. and we have phenomenal wives and spouses and grandma and grandpa that make cookies and cakes and lasagna and stuff like that.

And they take care of us, which is phenomenal. But eat an apple, get that good healthy proteins and carbohydrates and, and fruits and vegetables and keep that good food coming in. And then finally, if you need a mental break, take it, you know. So whether it's not working on a Sunday or taking a holiday off, just make sure that you're doing what you need to for that mental health as well. And again, you know, when it comes to this, Chris and I talk about it a lot. This, this, this health side of things is important. You want to let your equipment or your checkbook or your business get in a poor health position. Don't do that for your body either. So ultimately, just wanted to share a quick message here before today's episode. You're going to hear it a couple of times throughout the fall here. We just, we care about you guys too much.

We want to make sure that you're staying safe out there. And as always, if you ever need anything, give us a call. We're here for you. Thanks.

Chris: Welcome, everybody, to another episode of the Ag View Pitch. And we're going to pigtail off of a margin protection conversation that Shea had with Steve Johnson. And today I've got with me Duane Lowry. Duane, how's it going?

Duane

Lowry: Good, Chris. Glad to be here.

Chris: Well, I'm glad you're here too because, you know, we had a little conversation offline and you are a crop insurance agent. You understand margin protection really well, and Steve and Shay did a great job of talking about it. And one of the things I wanted to try to accomplish with this conversation for everybody, and this might be one that people may want to listen to a second time if you need to understand margin protection a little bit better. But just want to have a conversation with you, Duane, about what is margin protection. And, you know, and I joked offline, you know, margin protection for a third grader. You know, there's a lot of pieces to the margin protection puzzle. Everybody's getting ready to harvest. People don't like writing big checks when you're at the end of the year. We're at the end of the year.

There's there's not as much money in the bank accounts right now. And so for that, or for those reasons, a lot of times people just kind of blow it off and say, well, you know, it's probably nothing I need or want, or, you know, I'm going to go combine corn and not worry about this stuff. But I just want to make sure for our clients and for our listeners that they are at least educated on what it is and what it can do to protect some of their risk and, you know, mitigate some of the risks. So with that all said, give me, you know, give me from your perspective, if I'm a farmer and I sat down in front of you and ask you as an agent to explain to me the margin protection, you know, how do you start that and what are some of your comments and points that you want to make?

Duane

Lowry: Well, first of all, I'm going to go back to one of the comments you made about profitability and spending more money for insurance. The margin protection policy, number one, is a county-based product, so it doesn't— isn't impacted by how your crop does. It's impacted by what price and what the revenue protection was, but it's impacted with the data about how the county does as an average. So that's different than your RP policy. The reason that a farmer should take— consider more seriously this year taking the time to learn about the product, get an understanding of it, and then they can make a decision whether it fits for their operation. But the, the margin protection policy is going to protect on price or a yield trigger.

And in a year like this where you have the largest input costs you've probably ever had, by the time you take your elevated land costs, your elevated fertilizer input costs, the amount of risk and money you're putting out there by the time you go to the field is going to be record level. We happen to have prices right now for the '22 crop that can offset those extra input costs, still be profitable, and you've come— you've pondered back to what it was like from 2014 through 2020 in the month of August. This is still better profitability than you had any of those times, most of those years you were hoping for a chance and probably didn't even see the chance that's offered now. So there's— since the opportunity is there, and the— that means the risk is there that it won't be there, and yet you've had all these higher elevated costs. So there's reasons to look at it differently.

And this year, if the price is roughly a dollar higher than what it was for any— most any of the last several years looking ahead for the new crop, that's $200 an acre more of revenue. A 95% margin protection policy is going to help protect a larger portion of that revenue.

Chris: Okay, so if I'm a farmer and I'm asking you, you know, what, what is the— what kind of level, you know, should I be, be taking? You know, what, what are the questions you're going to ask back?

Duane

Lowry: You know, what, what things do, as farmers, we need to be The first thing I think that we would do is you would take your expected, your approved yield, we would multiply it by the price that margin protection has now as it quote unquote spring price. It's been established between August 15th and September 15th, so we now know what that is, which is $5.06 a bushel. And so if you have a 200-bushel approved yield, you're talking about, about, uh, $1,012, right? Okay, of revenue. You take that times 95%, and that's the amount of coverage that you have with the margin protection policy. It's not quite as simple as I'm making it out, but for the starting point— we'll get into the weeds later— but starting point, that's the reference. Now you compare that to normally you buy an 80% policy, for instance, and now all of a sudden you're only got $800 of revenue.

And I saw you doing the math. What was the math on the 95%? It was roughly $950, right? And the 80% RP is going to be $800. So right there, there's $150 more of revenue protection that is available. If you compare it to an 85%, it's going to still be $100 an acre more of revenue protection. Now the RP policy is going to be based on your own operation, what you actually got for yield, what the fall price was, how that compares. And every farmer knows how to do that calculation. They've been doing it for years. The margin protection works in the same manner, but it doesn't have anything to do with your own production. It has to do with what the county yield was. That figure isn't released until the spring. So, um, the county has an expected, uh, county average, just like the farmer has an approved yield.

And so they'll do a calculation of price and yield, and they'll take 95%, and that'll determine whether you got an indemnity payment coming on that margin protection policy. But the mechanics of it, the way it works, is, um, first you— they'll calculate your RP policy and whether you have a, a payment due or not. Whether that was triggered by prices got lower or whether because of poor yield. And then they'll do a calculation on the margin protection. You can't collect on both policies. There's no double dipping here. So if your RP policy said that you have a claim worth $50,000 and the margin protection, when it was all calculated, said you have a claim of, of, uh, $55,000, you're going to get $5,000 more dollars. Because you had the margin protection policy.

The only real scenario that the margin protection policy will be a disappointment to you will be if your individual operation, your, your acres suffered an abnormal loss in relationship to the county. It doesn't matter if your yield is 10 bushels above the county on average or whether it's 10 bushels below. What does matter is that whatever you are, if you're 10 bushels above, you want to maintain that relationship. You don't want to have a year where you lost 40 bushels an acre but the county only lost 20. That scenario, you would be disappointed with the margin protection policy. But that being said, that's only talking about the yield component. If for some reason the price of corn dropped a dollar, you probably still would qualify for an extra payment because of that margin protection policy, just because of the revenue difference, price difference.

And if you look at current prices for, uh, '22 production, that this margin protection price is at $5.06, and current December futures are in, in that $5 range, um, you have, uh, a historical tendency that this is a year where margin protection might statistically be the most likely to be a good thing to have because you're more vulnerable to a price break. And we say that based off of history and price ranges of the last 10 or 15 years. It doesn't matter how bullish we think we are because we think the crop is smaller. It doesn't matter that we're concerned about a South American production or we're concerned about U.S. production next year.

Those are things we don't know, but what we do know is a profit opportunity is offered now, and the revenue is so much higher than it's been that it might be worth spending that extra $20 to $30 an acre to get the margin protection policy because you're trying to protect revenue that's $150 to $200 more. Plus you've already got profitability available. Most of the last 7 years at this time of the year or during the winter, you had a difficult time generating a positive cash flow.

Chris: I'm going to sound like an insurance salesman here, and I'm not one, but I'm a— I like risk mitigation. And you can get insurance poor. We've already— we talked about that offline. I mean, you can, you can probably go overboard, but on the same token, I think there's a perspective that needs to be looked at. And I showed you also, Duane, offline, you know, if you look at the cost of the margin protection and you look at it in terms of cost per bushel, you're talking, you know, for the high level, somewhere between that 14-15 cents a bushel. I don't know, but I screw my marketing up more than that sometimes and, and can't protect the same level of risk that what that brings in terms of overall value to risk mitigation and the, and the whole business for that matter.

Duane

Lowry: I think when you look at it from a risk management standpoint in conjunction with the level of profitability and revenue that's there, plus consider the fact that you're spending a record amount of on inputs, there is not a better risk management tool available in terms of crop insurance. Now you could get a 95% product maybe next spring, but, and it'd be based on your farm, but it might cost you another $30 or $40 an acre. So this is still the best value. Now there are some scenarios, they would be abnormal and I wouldn't say the word rare, but they would be very uncommon. But there are scenarios where that margin protection, because it's a county-based product, might not work as well for you on your own individual operation.

But most years and on averages, The margin protection policy is going to do a very good job, and when it comes to price, it'll, it'll have just as much level of, of opportunity to protect price as well an RP policy. And because it's 95% and not 80 or 85, you know, it's in a position to be a far better protector of price risk.

Chris: Yeah, and, and I don't want to come off from Ag View, you know, from, from the Ag View Pitch, from this podcast, of saying, you know, hey, we're absolutely promoting you know, margin protection. What I am promoting is education. You know, I want our listeners and our clients and farmers that, you know, that we work with to make sure that they've vetted opportunities. And, you know, whether it's risk management or opportunities on, on either side, there's a reason last year we didn't have any podcasts on margin protection. Maybe, I guess there's a reason, but the reason we're having it now is that, to me— and we're not talking soybeans, but On the corn, it's, it's $5.06. What is on soybeans?

Duane

Lowry: It was $12.55 or $12.56.

Chris: Yeah, so, you know, those price levels are extremely high. And, you know, just today we've been having some conversations with a few people here, and, um, you know, it's like, how many years have we had margin protection as an option?

Duane

Lowry: It started in about 2016, and it didn't have every county in every state available, and it's expanded, right? But it's still not available in every state, or every, every listener of a broadcast may not be able to get it. But the vast majority of people that grow U.S. corn and U.S.

Chris: bean, they, they will have this policy available, right? And, and so again, that's, that's the whole reason behind this. Again, we're not trying to— I'm not trying to sell this, and, and necessarily, but I want to make sure everybody understands it. So with that said, a couple of other questions.

Duane

Lowry: I want to follow up on that one minute before the next question. Um, it's very difficult in a podcast to speak specifics about the exact cost, this exact scenario, because every county is different, every farm operation is different based on their APH. It's going to make— it's going to make a difference, uh, what type of ground you have, um, and whether you've got your poorer ground in a different entity than others. It's going to matter whether You feel that in a, a year of stress where yields are hurt, that you've got ground that will perform better than the county as a whole, or whether you think you will perform not as good as the county of— as in the whole.

All of these are important factors that enter into this, and until you're talking individual with the producer, either on the phone or preferably in person, and you're going over their data to determine what is best for them, and you provide the information to them. Until you do that, you really don't know anything, right? Most important part about this podcast is to alert growers that there is a product out here, new in 2016, something that would have worked exceptionally well in 2013 and '14 when you came off of some high prices. And there is a product there that is definitely worth the time to determine whether it's for you and whether it's for your operation. There will be very large discrepancy between the amount of revenue that's protected through a margin protection policy than what they're used to on an RP. So therefore, there's a lot of opportunity to reduce that risk.

With that comes cost. And then once you gotta, you gotta break, get into the weeds and look at your own operation to determine whether it's worth it. But I have found over the last few years that, um, many people, once they understand this, decide there is value in that product. And I think that on years like this, it makes that value even greater. Everybody's got a different threshold of risk and how they like to deal with risk, but there definitely is more risk more money on the table this year than probably most have ever had in their operation, at least since a long time.

And, uh, so that's why we're having the discussion, to make people aware that it exists and to encourage them to take the time to learn the product, learn about the product, learn how it might be synergized with their marketing plan to, to enhance their marketing, to ease some of the concerns about their marketing, or whatever the case may be. There's a lot of other things.

Chris: Yeah, the frustrating thing as a farmer, uh, Speaking as a farmer, it's the time of year, you know, we all want to get rolling with the combines and stuff, and we've got what, September 30th is the deadline to be signed up. And so it's frustrating because we're trying to, we're trying to farm right now, and then we got to step back and, and spend some time in the office. But we talk about that a lot on the podcast is, you know, where are you making your money? Obviously we got to get the crop out, but on the same token, I think we also need to be thinking about '22 the risks that are out there. And, and, um, you know, you made a comment earlier about the amount of additional working capital that it's going to take in '22 versus '21, and that's a pretty significant consideration as well with the amount of dollars that as producers we're going to have laid out there.

Are there any other comments or any like key things that producers need to be aware of other than getting a hold of their crop insurance agents and making sure they're getting good counsel, is there anything specifically that you, you know, would point out?

Duane

Lowry: Well, I think there's a lot of things, but I would just summarize it by saying this is probably a product of the future. It is probably a direction that we're going to go in more, something along these lines that have some county-based product elements to it. Uh, the individual policies that give you a 95% coverage, they're just so expensive and, uh, most people don't find them that— to be that attractive. Um, this is all about risk management. And again, the margin protection policy has a spring price established at $5.06. We don't know what that RP price will be come February. Maybe it'll be $5.76. Maybe it'll be $4.50. We really don't know. But between now and February, if something bad happens, we have an economic downturn, China doesn't take as much as we think they're gonna have, South America ends up having a better crop than we think.

We know that they have the incentive because of prices to expand their acreage. So if something bad happens in terms of price between now and the end of February, you have nothing. In the crop insurance realm that's providing you any level of protection against what happened for '22, for what happens. But you do have the ability with its margin protection of immediately having that floor price and that revenue protection mechanism in place. I think there's a decent chance that that might prove to be beneficial this year. Two years ago it was beneficial, last year it was not. If you look at it over a law of averages of history, Many times it would be an advantage.

And the other thing that we mentioned some in the market podcast, prices have backed off some, but we have not had the type of, you know, massive sell-off and price capitulation and from the spec community or the farmers holding old inventory. We didn't have any of that this year. So we are still at a lofty level from that perspective too. Now some might argue that maybe that type of break won't ever come,. And that's certainly possible, but we are still at a much loftier level than we've had at any time since 2013 and '14 to market the next year's crop.

Chris: Yeah, that's for sure. And, and I, you know, you've made some comments to me earlier today too that, you know, by having that risk assurance, I guess, to, to a large extent, it allows you to maybe slow down, you know, feeling that urgency of having to pull the trigger. If it feels like that price is going down and then it rallies back again and we're at $4.90 or something and it went down to $4.50 and then it came back and you feel like you need to sell, when you've got that $5.06 number sitting there, it allows you to be a little bit more calm, a little bit more patient along the way too.

Duane

Lowry: Yeah, whether that's a good or bad thing, yeah, we don't know till the end. But for a producer that already has a mindset they don't want to market the '22 crop. They have to be honest and, and realize and know that they do have downside risk. Having the margin protection, uh, does— goes a long ways towards protecting you against some sharp drop in price. Say, I'd say a dollar, just to exaggerate. Um, that has a way of protecting you on that. So if you already know you're going to go slow on marketing, this is a way to, to still give you a floor. It's, it's kind of like a put, but if you were to buy a put over your entire crop for that far in advance, this would still be a cheaper policy.

Plus, significantly, plus you also have the yield protection policy component, and you have a 95% trigger mechanism even though it's based on the county, not your individual farm, versus your 80 or 85% RP policy that you would normally carry. And so there's a lot of compelling arguments here, and I think that when more most people sit down and actually make a commitment to take the time to learn what's there and then to examine it for their own operation, I think many people are surprised at how much extra revenue can be protected if they choose to do that. So it's definitely worth learning about it.

Chris: Well, Duane, I think this is a good place to wrap it up. I think we hit— I mean, is there anything that I didn't ask, anything I didn't hit on?

Duane

Lowry: No, I think I would just drive home the point again that it's worth your time to find out what is available. I think that there are also marketing components associated with the margin protection policy that you can synergize your, your marketing efforts using that margin protection policy, knowing that you have that there, and I think that allows for some enhanced marketing opportunities as well. So It's not only about the crop insurance, there are other aspects to it as well. And so, you know, obviously that takes a different type of discussion than just plain crop insurance, right?

Chris: Right. If somebody wants to get a hold of you just to bounce some questions off of you, um, not able to get a hold of their agent or whatever, I guess, or, you know, or if you, you know, you're willing to have this conversation on some specific questions, what's the best way for people to get a hold of you?

Duane

Lowry: Best way would be to just give me a call. My phone number would be 563-419-1300, and I'd be happy to talk to anybody and answer basic questions or get into specific examples for their operation if they wanted to find that. But I would definitely be interested in doing that, and I think that it would be beneficial for them to get an understanding of how this can be connected to their marketing and how it can be synergized. And that's a conversation that probably be a little deep to have over the podcast, right?

Chris: Well, and, and that's, you know, really appreciate that, Duane, because there's probably some people out there that want to learn it, want to understand it. And with you being willing to have that conversation, we sincerely appreciate that, um, on behalf of in advance of anybody that wants to give you a call and corner you, because there's probably some specific questions. And then to your point, you said, you know, hey, every operation is different, every scenario is different, and, and how people market, market their grain is different from one operation to the next too, and can have some changes on that, and how and where they're at in the county, and just a lot of variables. So Duane, thank you very much, really appreciate you being here, and, and you get ready for your phone calls probably here.

Duane

Lowry: I'll be happy to take the phone calls. Thank you for the opportunity to be here. I, I've enjoyed it, and, um, I appreciate your listeners. You've got high-quality listeners.

Chris: Yeah, we're really fortunate that way. And again, the deadline for getting this policy purchased is September 30th, right?

Duane

Lowry: September 30th. It's like, uh, your regular crop insurance you're used to. You don't pay for this until the fall of, uh, 2022, just like, uh, your RV, boss.

Chris: Right, awesome. Thank you very much, appreciate it, Dwayne.

Duane

Lowry: Thank you.

Chris: Yeah, and thanks everybody for listening. Hopefully this was valuable, and we will catch you again next time on the Ag View Pitch.